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					INGERSOLL-RAND Moderator: Joe Fimbianti 10-22-03/10:00 a.m. CT Confirmation # 537861 Page 1

INGERSOLL-RAND Moderator: Joe Fimbianti October 22, 2003 10:00 a.m. CT

Operator: Good day everyone, and welcome to the Ingersoll-Rand third quarter, 2003, earnings conference call. Today's conference is being recorded.

With us from the Company is the Chairman, President & CEO, Mr. Herb Henkel; the Chief Financial Officer, Mr. Tim McLevish; and Mr. Joe Fimbianti, the Director of Investor Relations.

At this time, for opening remarks and introductions, I'd like to turn the conference over to Mr. Fimbianti. Please go ahead.

Joe Fimbianti: Thank you.

Good morning. This is Joe Fimbianti. I'm Director of investor Relations for Ingersoll-Rand. Welcome to our third-quarter 2003 conference call. We released earnings at 7:00 A.M. this morning. The release is posted on our Web site.

I'd like to cover some housekeeping items, as usual, before we begin. This morning, concurrent with our normal phone-in conference call, we will be broadcasting the call through our public Web site. There you will also find the slides for the presentation for this call. To participate via the Web, go to, click on the yellow link on the left-hand side of the screen. Both the

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call and the presentation will be archived on our Web site, and will be available some time this afternoon.

Now please go to slide number (2). Before we begin, I'd like to remind everyone that there will be forward-looking discussion this morning, which is covered by our Safe Harbor statement. Please refer to our June 30, 2003, form 10-Q for details on the factors that may influence results.

Now I'd like to introduce participants of this morning's call. We have Herb Henkel, Chairman, President and CEO of Ingersoll-Rand, Tim McLevish, our Senior Vice President & CFO, and Rich Randall, Vice President and Controller. We'll start with the formal presentation by Herb Henkel and Tim McLevish, followed by a question-and-answer period.

Herb Henkel will start with an overview. Now if you would please go to slide number (3).

Herb Henkel: Thank you, Joe, and good morning everyone. Welcome to our third-quarter 2003 conference call. This morning we reported net earnings of 88 cents per share, which includes both continuing, as well as discontinued, operations. Our total net income increased 73 percent compared to the third quarter of 2003, and earnings from continuing operations almost doubled. Our EPS from continuing operations was 88 cents per share, which is well above the upper end of the 74 to 79-cent range we provided during our second-quarter conference calls in July.

Our ongoing legacy costs for discontinued operations were $9.5 million during the quarter. We realized a $10.8 million gain from the sale of two of our small non-strategic businesses, Waterjet, a cutting-equipment manufacturer, and (Laidlaw), a distribution business that's based in the United Kingdom. Both businesses had annual revenue use of approximately $30 million.

Now please go to slide number (4). The tone of business and our overall activity levels for the quarter, improved compared to last year, and was roughly comparable to the second quarter of

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this year. However, I still believe it's a little bit early to declare that "the recovery is here" as endmarket demand in some of our key industrial and construction and end markets remain sluggish.

When I spoke to you on our second-quarter conference call, I reported that we were able to outgrow our end markets and to gain market share through product innovation and the expansion of our recurring revenue stream. That pattern of success continued through the third quarter, as we saw clear indicators that the value proposition we present is truly resonating with our customers. We saw continued momentum build in our revenue growth from the second quarter. And our earnings were driven by strong revenue increases and improved operating margins, which reached 9.8 percent during the quarter. Third-quarter revenue growth was approximately 14 percent, of which eight percent was organic, three percent was attributed to foreign exchange, and three percent was the result of additional buy-out revenues at Dresser-Rand. Our organic growth number of eight percent is also an improvement on the six-percent organic growth results we recorded in the second quarter of this year. All four of our business sectors experienced growth during the quarter, compared to the third quarter of last year. Specifically, we achieved 19-percent growth at Bobcat, 12 percent at Thermo King, 10 percent at Air Solutions, and 35 percent at Dresser-Rand, excluding their buy-out component. And looking at our overall thirdquarter results, all the key metrics by which we measure ourselves indicate that we're continuing to make progress in executing our strategy, and that clearly our strategy is working.

Now please go to slide number (5). Now I'd like to update you on our success for the third quarter by taking you through the three components of our IR vision statement, to drive shareholder value through dramatic growth, operational excellence, and duel citizenship.

Now please go to slide number (6). First focusing on dramatic growth – despite the persistence of some uncertain market conditions, we achieved strong revenue growth. As we discussed with you previously, our growth strategy is built around developing and delivering innovative products and solutions, growing our stream of recurring revenue, and leveraging both our acquisitions.

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Now please go to slide number (7). I'd now like to tell you about some of our emerging innovation successes. Our investments in new products and technologies has been one of the prime reasons that we've continued to increase revenues, in spite of some difficult end-market conditions. During the third quarter, we saw increased customer acceptance of our new products as these new solutions were tested in day-to-day operations, and our customers realized the benefits of these solutions.

For example, on our last call I spoke to you about Hamburg Sud, a major marine transport company that had purchased 2,500 of our climate-control sectors Thermo King Magnum refrigeration units, because of their efficiency and a capability to hold temperatures at 30 degrees below zero Fahrenheit. During the third quarter, this customer purchased an additional one thousand Magnum units as they looked to leverage our innovative low-temperature capability to pursue market share and premium shipping rates in a highly-competitive seafood trade. And the performance of the Magnum hasn't gone unnoticed by the rest of the international transportation industry. Another one of the leading international carrier, (Oriental Container Line Limited), they purchased 800 Magnum unites during the quarter, which is a great indicator of the industry's view of Magnum as a competitive differentiator. This is an excellent example of the Ingersoll-Rand enterprise-delivering innovative solutions that provide a competitive advantage for our customers, solutions that shift our customer's business landscape to help them achieve increased revenues and increased profits.

Now please go to slide number (8). We also saw increased customer and industry acceptance in our Infrastructure Sector during the quarter as Bobcat's new product sales continue to drive strong revenue and market-share results, despite constrained overall end-market activity. Our investments and innovation are clearly paying off at Bobcat. Our all-wheel steer skid loader, and our track loader, both non-traditional skid steer products, have created their own place in the market, as customers recognize benefits of these innovative products, and increasingly choose

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them for compact-equipment needs. Additionally, the Toolcat continued to deliver strong retail sales during the quarter, and is fueling our push toward a full-year goal of $100 million in revenue from Bobcat's new product sales.

The Toolcat's strong customer acceptance has also been complimented by positive accolades from trade publications and industry experts. "Diesel Progress" recently named Toolcat the offhighway vehicle of the year, lauding Toolcat as the most innovative product that the magazine has seen in the last 12 months. By the way, this is the second year in a row that Bobcat has captured the off-highway award for "Diesel Progress." Last year, the Bobcat A220, the industry's first all-wheel steer skid loader won that award. Over the next several years, we will continue to execute an aggressive schedule for new product introductions at Bobcat.

Please go to slide number (9). In our Industrial Solutions Sector, our innovative Nirvana Air Compressor reaped the benefits of continued and growing customer and industry acceptance during the quarter, while our productivity solutions business launched an innovative new product that's driving very strong revenue and profit gains.

Despite the depressed level of industrial production in many key North American and European markets, we have continued to grow our air-solutions business. Third-quarter orders improved by more than 14 percent, following similar first and second-quarter sales-growth results. We shipped more than 800 Nirvana I and Nirvana II units year-to-date, as the Nirvana line continues to create demand because of its recognition as a customer solution that delivers bottom-line results.

Now please go to slide number (10). In our productivity solutions business, we strengthened our market-leading position and composite impact tools by introducing the first Titanium pneumatic impact wrench on the market. Our innovative new half-inch and three-eighth-inch tools are the lightest and most powerful impact wrenches available through the third quarter, our Titanium

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impact program has posted a sales increase of 32 percent in the air-tool category, compared to the same period in 2002.

Now please go to slide number (11). During the third quarter we also continued to deliver on our goal of growing our stream of recurring revenue. Our large installed base and powerful marketleading brands provide us with significant opportunity to expand revenue and profitability. Recurring revenues totaled a record $664 million for the third quarter, an increase of approximately 16 percent compared to the third quarter of 2002, and a 22-percent increase compared to the third quarter of 2001. Recurring revenues now account for 26 percent of our total revenues for the quarter. (Hussmann) and Air Solutions have been our major focus for recurring revenue expansion, and both made solid gains in the quarter.

Please go to slide (12). Our (Hussmann) service offerings to supermarkets and convenience stores also expanded during the quarter, adding over 500 locations. We now service more than 4,900 locations for several major retail chains. Total parts, service and installation revenue increased by 19 percent, compared to the third quarter of last year, and comprised 34 percent of total sales.

Please go to slide number (13). In Air Solutions, we achieved the recurring revenue increase of 10 percent during the quarter. This accounted for over 48 percent of the total revenue for the Air Solutions business. We've booked over 11,750 Air Care contracts, an increase of 39 percent compared to year-end 2002. And our total contract growth is on target to exceed 13,000 by the end of this year, which would be a 50-percent increase compared to the end of last year. Additionally, this service business maintained its operating margins at over 20 percent while requiring no incremental investment.

Now please go to slide number (14). From a bolt-on acquisition standpoint, during the third quarter, we acquired stock of Integrated Access Systems, including its Geoffrey Industries

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division. IAS provides specialty security-system integration solutions, serving as a single source for integrating a facility's access control technologies, closed-circuit television and alarmmonitoring systems. IAS has eight offices throughout the United States, and had revenues of approximately $27 million in 2002. IAS has been integrated into our Electronic Technologies Corporation business, which we acquired in the second quarter of 2002. Geoffrey Industries has been integrated into Interflex Business Unit, an acquisition we made several years ago. This acquisition will enhance our ability to provide customers with a complete solution for managing operating, people and assets.

Now please go to slide number (15). Now focusing on operational excellence, during the quarter, we continued to benefit from cost reductions associated with our restructuring and our productivity investments. And we're on target to deliver on our goal of realizing a full-year EPS benefit of 25 cents from restructuring activities. We maintained our focus on managing the things that we can control, managing costs and inventories, improving our working-capital turns, and maintaining high levels of customer service.

Please go to slide number (16). During the quarter, we continued to use the principals of lean manufacturing as the framework for our Lean Branch process improvement initiative within our Hussmann branch operations. The goal of Lean Branch is to implement lean processes to establish best branch practices, which will then be applied throughout the Company. This initiative is focused on three critical areas, back-office consolidations, technician productivity and part sourcing. We've also furthered our effort to better leverage our Thermo King parts purchasing and distribution infrastructure to benefit Hussmann service operations. Currently we're sourcing approximately 30 percent of our Hussmann repair parts through Thermo King. We expect this number to continue to increase through the fourth quarter of this year. From a results standpoint, we're pleased with the success of Lean Branch on the year-to-date basis. Our Hussmann branch operating revenues have increased 14 percent year-over-year. And our operating earnings have improved by 45 percent. We expect these results to continue to improve

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as our implementation of this initiative progresses. Our target remains to reach a 15-percent operating margin during 2004.

Now please go to slide number (17). Also from an operational excellence standpoint, specifically regarding our ability to leverage process excellence in our key customer relationships, our Security and Safety Schlage business was recently named Supplier of the Year by Lowe's HomeImprovement Warehouse, the world's second-largest home-improvement retailer. Schlage was selected from approximately 25,000 Lowe's vendors for the honor, which recognizes Schlage's product innovation, merchandising, on-time delivery and superior quality. To quote Lowe's announcement on the award, "Schlage is a true leader in the hardware category. And we're pleased to name them the best of the best." Schlage was also recently voted number one by professional builders, professional remodelers and architects as the more preferred and most used lock brand. This type of recognition by a large customer like Lowe's and by the end users of our products, are real-time, real-world indicators of the success of our enterprise commitment to be recognized as a proven source of proven solutions.

Now please go to slide number (18). Now focusing on duel citizenship – we continue to see the incremental growth and operational excellence benefits of the enterprise strategic initiatives we launched last year. We have two great examples to tell you about. First, I'll update you on the progress of our retail-solutions initiative. Last year, our retail sales totaled approximately $32 million. This year we already achieved more than $65 million, and are on target to achieve our full-year goal of $85 million to $90million of incremental revenue from retail solutions.

Please go to slide number (19). I also want to provide an update on our IR Works and IR Supplier Solutions initiatives. Following their launch last year, IR Works, which focuses on enterprise-wide cross selling opportunities, and IR Supplier Solutions, which targets sales to our key suppliers, had combined total sales of about $6.2 million. This year, through the third quarter, these two initiatives have already achieved total sales of approximately $28 million, and are on

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target for a full-year goal of $40 million. This success is significant for three major reasons. First, the rate of revenue growth is very favorable. Second, like IR Retail Solutions, both of these businesses require very little investment, and have very low overheads. So the result is very high, profitable, incremental growth. And third, the success of initiatives like IR Works, and IR Supplier Solutions, are terrific positive indicators of our effectiveness in transforming our culture, and the way our sales force goes to market. All around the globe, sales managers from IR's diverse businesses are meeting and working together to generate quality, cross-selling sales leads and converting them to sales wins. This is very encouraging as we look forward.

Now please go to slide number (20). Overall, this was another very successful quarter for our company. We were able to meet, or exceed, our targets. And we believe that your results clearly demonstrate that our investments and innovation, as well as the operational improvements that we continue to make, are building a stronger enterprise that's able to perform well in all market conditions. By continuing to execute our strategy, we expect to maintain our track record for strong cash generation, and to continue using out free cash flow to fund further profitable growth and innovation.

Tim McLevish will now cover IR's business unit performance in more detail. Tim?

Tim McLevish: Thank you, Herb, and good morning. I would like to begin my discussion with the quarterly financial results. We continue to report the results of divested businesses, including Engineered Solutions, as part of discontinued operations, net of applicable taxes. We have restated 2002 to be on a comparable basis.

Please turn to slide (21). Reported revenues for the third quarter were up 14 percent to $2.5 billion. The increase is largely attributable to double-digit growth at our Thermo King, Bobcat, Air Solutions and Dresser-Rand business units. Organic revenues, excluding the impact of Dresser-

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Rand buyouts, and the favorable impact of currency, totaling approximately six percent, were up about eight percent compared to last year's third quarter.

Operating income for the third quarter was $224.3 million, or 8.9 percent of revenues. Margins have increased by over two percentage points compared to last year's third quarter. There strong operating results are being driven by revenue growth and cost control.

I would like to take a moment to discuss year-over-year costs that are included in our reported results. Our third quarter 2003 included approximately $22 million of increased pension and medical costs, $11.9 million of costs associated with the appreciation of previously awarded stock-based compensation and $11.9 million in productivity investments. Prior-year results include $14.6 million of restructuring and productivity investments.

Moving down the income statement – interest expense was $42.4 million compared to $58.7 million in last year's third quarter. Approximately $10 million of a reduction in interest expense is directly related to the retirement of $700 million of debt from the proceeds of the Engineered Solutions divestiture. The balance of the year-over-year improvement is related to additional debt reduction and lower interest rates.

Other expense for the quarter was $3.7 million, compared to zero expense in last year's third quarter. This year's expense was reduced by $3.8 million of net adjustments attributable to prior periods between 1999 and 2003. The increase in expense is largely attributable to the favorable impact of insurance-claim proceeds recorded in the prior year, and year-over-year changes in currency.

Our third-quarter effective tax rate was 14 percent, compared 13.1 percent in prior year. We continued to expect our effective tax rate to be approximately 14 percent for the full year 2003.

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Net earnings from continuing operations for the third quarter were $153.3 million, or 88 cents per share, which significantly exceeded our original third-quarter guidance of 70 to 75 cents. Discontinued operations, which include the legacy costs of Engineered Solutions, and other previously divested businesses, reflected an after-tax loss of $9.5 million, or six cents per share in the third quarter. Also included was the net gain on the sale of the Waterjet and Laidlaw businesses of $10.8 million, or six cents per share. Our total net earnings for the quarter were $154.6 million, or 88 cents per share compared to $89.3 million or 53 cents in last year's third quarter.

Please turn to slide (22). Our 14-percent revenue growth, which included three percent favorable currency, showed increases in all geographic regions. North American revenues were up about nine percent, and constitute approximately 65 percent of total revenues. The European-served area revenue growth, after removing the favorable impact of Dresser-Rand buyouts, was up27 percent compared to last year. Approximately half of that amount was the impact of currency. Asia Pacific was up one percent, and Latin America was up approximately three percent versus 2002.

I would now like to take a few minutes to talk about the results of our segments. Please turn to slide (23). The Climate Control segment, which includes Hussmann and Thermo King, reported third-quarter revenues of $684 million, an increase of about seven percent or four percent excluding currency, compared to last year's third quarter. Operating income for the sector was $67 million, representing an operating margin of 9.8 percent, which reflects an increase of more than three percentage points compared to last year. The operating margin improvement is being driven by Thermo King revenue growth leverage, favorable price movement, and the benefits from our productivity-improvement programs. Hussmann revenues for the third quarter were up two percent year-over-year, due primarily to the impact of currency.

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We continue to see depressed spending on refrigerated display cases across many of the major U.S. supermarket chains, as the industry continues to experience turbulence and financial uncertainty. This shortfall was offset by an increase in recurring revenues, which were up 19 percent from prior year.

Profit margins from our Branch Service operations continue to improve, due to our Lean Branch initiative. Thermo King revenues were up 12 percent, or eight percent excluding currency, due to strong growth in our worldwide truck, trailer and bus businesses, as well as continued strength in our after-market business. This trend, and supporting industry data, indicate that markets for refrigerated transportation are in a recovery.

Please turn to slide (24). The Air and Productivity Solution segment reported third-quarter revenues of $348 million, representing a nine-percent increase over prior year. Air Solutions reported a 10 percent-growth in revenues, or six percent excluding currency, driven by new products and services. Recurring revenues were up 10 percent, and constituted 48 percent of the total. Productivity Solutions revenues increased by six percent over the third quarter of last year. Operating margins for the segment were 7.6 percent of revenues, compared to 3.3 percent last year. Please note that last year's margin was 6.1 percent before restructuring charges. Year-over-year improvement was attributable to revenue growth, new product margins and ongoing productivity improvement programs.

Please turn to slide (25). The Dresser-Rand segment reported revenues for the quarter of $379 million, up from $231 million last year, an increase of 64 percent. Revenues, excluding purchased components that are sold or passed through to customers at low margins, were up 35 percent, while our recurring revenues were up 31 percent. Operating income was $5.9 million, or 1.6 percent of revenues, versus last year's operating income of 9.1 million, or 3.9 percent of revenues. Included in this period's operating income were a $1.1 million out-of-period adjustment to correct some accounting errors dating back to 1999. Additionally, the results were affected by

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restructuring costs and the effects of an inventory reduction totaling $11.2. Absent to nonrecurring costs, we are on track with our profit- improvement program. Dresser-Rand backlog was $481 million at the end of the third quarter.

Please turn to slide (26). The Infrastructure Sector reported third-quarter revenues of $692 million, up 11 percent compared to last year, and operating margins of 9.8 percent of revenues compared to 7.2 percent last year. Bobcat revenues increased 19 percent, or 15 percent excluding currency. The increase was attributable to improving North American markets, growth in new products and improved rental-account activity. The IR branded businesses showed seven-percent increase in revenue, four percent excluding currency, compared to a weak quarter last year. Club Car showed flat revenues with market share gains offsetting generally soft markets. Sector operating income improved to $67.7 million or 9.8 percent of revenues compared to $44.7 million, or 7.2 percent of revenues last year. The operating-income improvements were attributable to revenue growth leverage and the benefits of our productivityimprovement programs.

Please turn to slide (27). Security and Safety continues to report strong results. This segment reported revenues of $417 million, a six-percent improvement compared to last year. Revenue growth was five percent, excluding the impact of currency. Year-over-year growth was largely attributable to solid performance in our mechanical businesses, and strong growth of 20 percent in our Worldwide Solutions business. Operating margins were 21.2 percent compared to 18 percent last year. The three-percentage point margin increase reflects the impact of solid North American volumes, favorable product mix and cost control. Security and Safety ended the quarter with a strong backlog.

Please turn to slide (28). And let's move on to the balance sheet. Our Working Capital Management program continued to show progress in the third quarter. Working Capital was 8.6 percent of revenues compared to 10.6 percent for the comparable period last year.

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Please turn to slide (29). At the end of the third quarter, our total debt was $2.4 billion, an improvement of $1 billion compared to the third quarter of last year. The improvement was largely attributable to the repayment of $700 million of debt with proceeds of the disposition of Engineered Solutions. And in addition, our free cash flow was used to further reduce debt levels in the quarter. Our debt-to-capital ratio for the quarter was 36.3 percent compared to the prioryear ratio of 48.1 percent. During the month of October, we terminated our Assets Securitization Program. The repurchase of approximately $240 million of receivables will be funded by shortterm borrowing. Inclusive of this change, our debt-to-capital ratio is expected to be at the low end of our target ratio of 35 to 40 percent by year-end. Capital expenditures for the third quarter were $24.4 million, which is about the same as last year. We expect to spend $125 million for the full year of 2003.

Herb will now conclude our formal remarks with the outlook for the fourth quarter and full year 2003. Herb?

Herb Henkel: Thank you, Tim.

Please go to slide (30). As I noted to you earlier, our end market activity continued to show mixed signs of improvement during this third quarter. Although we remain cautious, our order activity improved during the quarter, and we anticipate gradual improvement in most of our major construction, and industrial markets during the remainder of 2003. More specifically, by business, we anticipate that our Climate Control sector will see fourth-quarter activity similar to the pattern we saw in the third quarter. We expect that supermarket expenditures for display cases from our major customers will remain depressed, while the growth of our service revenues, as well as increased profits from efficiency gains, will help improve our margins. Thermo King is expected to continue its upward growth projectory with improved sales and operating-margin results. While our Industrial Solutions sector will continue to face slow-growing end market in North America

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and Europe, we expect to continue growing through new product and service-revenue gains. At Dresser-Rand, end markets will remain strong as we close the year. Year-over-year revenue gains at Dresser-Rand will be much below what achieved during the first three quarters of this year, as they have managed to dampen the seasonal swings in their revenues. Their operating margins are expected to be in the range of eight percent to 10 percent, based on restructuring and cost-reduction activities.

Our infrastructure sector would also see a mixed picture. Bobcat is expected to have a strong fourth quarter as new-product sales accelerate in an improving market. We expect road machinery and portable power to see very modest growth in a difficult North American market, which will be offset by growth in the rest of the world. And Club Car will have its usually seasonally slow fourth quarter.

Our Security and Safety sector should maintain its momentum in the Electronic Solutions business with double-digit plus growth. Meanwhile, our traditional Security Hardware business will continue to grow due to modest end-market growth and market share gains. Operating margins in the fourth quarter are expected to be in the 18 to 19-percent range as we accelerate investments in our Security Solutions business to insure future growth. In aggregate, we expect organic revenue growth, in the fourth quarter, to be approximately four percent to five percent.

Now please go to slide number (31). We currently expect EPS, for the fourth quarter of 2003, to be in the range of 93 cents to $1.03. This includes 86 cents to 94 cents from continuing operations, and approximately seven cents to nine cents of net after-tax earnings-per-share from discontinued operations.

Now please go to slide number (32). We are updating our full-year diluted EPS projection for total operations to be $3.20 to $3.30. Incorporating the gain on the sale of divested businesses of 37 cents per share would bring the range of reported EPS to $3.57 to $3.67 for the full year 2003.

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Now please go to slide number (33). Over all, this was a positive quarter where we made strong progress in executing our long-range plan. Our results reflect the viability of our strategy, and the ability to deliver strong performance for our investors. From the dramatic growth standpoint, we continue to drive profitable growth by developing and delivering innovative solutions for our customers, and by growing and improving the profitability of our recurring revenue stream. We achieved excellent organic growth results of eight percent, which is above the top end of our target four-to-six-percent range. From an operational excellence focus, we maintained our pursuit of continuous improvement to gain the full benefits of our restructuring and productivity investments, and to achieve permanent reductions in our operating-cost structure. Our sectors that are still below the stated goal of 15-percent operating margins, have moved solidly in that direction. And the remaining sector, Security and Safety, maintains strong margins in excess of 20 percent. And from the duel citizenship standpoint, we continue to leverage the benefits and power of collaboration as we maximize the strength of the entire IR enterprise to drive to improve results across all of our business. We strengthened our balance sheet, and our debt-to-capital ratio of 36 percent, which is at the lower end of our 35 percent-to-40-percent target range. Finally, we are on track to reach our full-year earnings forecast of $3.20 to $3.30 per share in our free cash flow target of over $400 million. Clearly I believe we're executing our strategy.

Now please go to slide number (34). This ends our formal remarks. I would like to now open the floor to your questions. Thank you.

Operator: Thank you. The question-and-answer session will be conducted electronically. If you do wish to signal for a question, you may do so by pressing star one on your touch-tone phone at this time. We will come to you in the order that you signal. And we'll take as many questions as time permits. Once again, that is star one on your touch-tone phone at this time for questions. And at the request of the Company, please limit yourself to one question and one follow up.

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Our first question will come from David Raso, Salomon Smith Barney.

David Raso: Hi, good morning. Clarification first – the Dresser-Rand fourth-quarter margin, did you say nine to 10 percent?

Herb Henkel: I'm sorry, I said in the eight-to-10-percent range, David.

David Raso: And the Security and Safety ...

Herb Henkel: I said 18 to 19.

David Raso: Yes, all right. So that is helpful. But what I'm struggling with a little bit on the guidance, Dresser-Rand – let's say the growth does slow tremendously, you know, only five percent after the torrid growth we've seen. That margin you're implying still gives you a pretty large sequential improvement in profits, somewhat, you know, reminiscent of when the business was more seasonal, still a very strong fourth-quarter ramp in profits from third. And the way I'm running the numbers is, it looks like Dresser-Rand then would give you about $26 million of incremental profit in the fourth versus the third.

But what your guidance in implying is ex Dresser-Rand, the third, the fourth quarter, your core profit dropped about 12 percent. And the Security and Safety margin comment helped explain some of it, but given the momentum in some of your businesses, I'm not sure what you're implying about your end markets or your Company's performance in your segments to have core profits down that much sequentially given you think the macro backdrop gives you a little more momentum third to fourth this year than it did last year.

Herb Henkel: Yes, David, directionally you're right. And Dresser-Rand should have considerable recovery from the third quarter into the fourth quarter. We are not implying that there is weakness

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in any of our other end markets and other businesses we pointed out. Security and Safety reduction is a component of that. In part, some of the reduction in Security and Safety is the result of some investments we're making in that business that we're anticipating the third quarter kind of got pushed into the fourth quarter, so there's some impact from that. Dresser-Rand actually will undertake, or is continuing to be restructuring in productivity investments in that business, that will take some of that up side away that you talked about. We're also seeing a bit heavier medical costs in some of our, or all of our businesses that will eat into that.

David Raso: Sequentially, sequentially more medical in the fourth than the third?

Herb Henkel: It's ramping up a little bit from the third to the fourth quarter. I mean, and it's a couple million, a few million dollars perhaps. It's not massive, but it's a piece. And you know the value of the dollar has strengthened since the third quarter. And we'll see a few cents of FX impact, fourth quarter versus third quarter.

David Raso: OK, (if you) brought Dresser in last year, you know, excluding structuring, yourex DresserRand businesses were up five percent in operating profit. This seems to be a pretty dramatic up five to now down 12. But some of those items were helpful. So thank you.

Herb Henkel: Some of what you're seeing, David, is we're in some generally improving markets. And some of the seasonality that we would normally expect to see from the third quarter to the fourth quarter is kind of being dampened in that kind of up pick.

David Raso: And I'm sure that Hussmann's not getting the sequential growth it normally gets.

Herb Henkel: Hussmann's, there in a difficult market, yes. And we aren't seeing as much normal up tick in the fourth quarter that we otherwise would expect to see.

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David Raso: OK, thank you very much.

Herb Henkel: Sure.

Operator: And we'll take our next question from David Bleustein with UBS.

David Bleustein: Just a couple of follow ups. First, was there any financial impact in the repurchase of the $240 million in receivables?

Herb Henkel: No, no, none. I mean, other than the balance sheet, there's no P&L impact.

David Bleustein: OK. And here's the question – can you talk to the profitability of the Hussmann aftermarket operations in the current quarter, and how that's sequentially changed from Q1 and Q2?

Herb Henkel: I'll start it off this way, David. Going back to the beginning of the year, we were talking about profitability that was running as below five percent. That subsequently improved to where, by the time we now got to the end of the third quarter, we were actually running at 8.7 percent, very close to a nine-percent level. And we targeted fourth quarter to be around 10 percent.

David Bleustein: OK. And then, final question – given the improvement in the balance sheet, and the cash flow generation, any change for a share repurchase? Or where should we be expecting you to go next?

Herb Henkel: We're not prepared to announce a share repurchase at this point. As you know, we still have authorization under our previous repurchase authorization. But we need to balance with, with, with further debt reduction and other investments we might consider.

David Bleustein: OK, terrific. Thanks.

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Operator: And we will take our next question from Stephen Volkmann with Morgan Stanley.

Stephen Volkmann: Hey, good morning.

Herb Henkel: Hey, Steve.

Stephen Volkmann: Just a question, I guess, on Hussmann. Part of he restructuring, I guess, that's been done there this year was aimed at getting your costs in the sort of entry-level product down to a point where you could start to play in that part of the market where I guess you haven't really historically. And some of your competitors look like they're still selling some cases. I'm just curious, sort of, where you feel you are in that process.

Herb Henkel: I think that what you saw at the FMI show out in Chicago back in May was a product launch for a standard-priced, more of a massed-produced product rather than the one-of-a-kind that I think Hussmann was more noted for. I think we are, at this point in time, introducing those to customers. But what we see is that they take a time until they actually wind up being received by those customers. Right now, our biggest potential customer for that is, obviously, Wal-Mart. And there are some significant quotations that are out right now, which will be resolved within the next few weeks. And I think then we'll see, in the fourth quarter and into the first quarter of next year, the actually implementation of those "more standard-priced products."

Steve Volkmann: OK, great. And just on the service business, on both Air Solutions and in the refrigeration, you know, margin targets of 15 plus percent, I mean normally I think, at least I think, of service business as lower margin over all. Can you just sort of tell us how you get there?

Herb Henkel: Yes. Let me make – rather than speculating, let me specifically speak to what we do in Air, which as I said to before already, was really running well north of even 20 percent. A key part of

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this is obviously the productivity of the operation. And a very, very important driver for the profitability had to do with the replacement parts. Replacement parts, in general, we find have gross margins that are about 50 to 60 percent or higher. And so to the degree that you're able to have 20 to 30 percent of the total revenues actually being parts, which have this kind of gross margin, follow it up with hopefully five plus hours of billable hours for each technician, and you leverage the back room, and you get parts coming through a Thermo King operation. We see the combination of all of those fixes, frankly, quite north of 15 percent. But the parts are a critical piece. If we were not in the parts business, I would not be as robust, if you will, in my enthusiasm for why this after-market business is so strong for us.

Steve Volkmann: That makes sense. Thanks.

Operator: Our next question comes from Gary McManus with JP Morgan.

Gary McManus: Hey, can you, you know, you give the margin expectation for Dresser-Rand. But you know, it's hard to predict the revenues there, particularly with the buyouts. Can you give kind of some rough order of magnitude of what kind of revenues you expect in Dresser-Rand in the fourth quarter?

Herb Henkel: We're looking at Dresser-Rand, I would say, to being flat to up maybe two percent. So the bandwidth I would give you, Gary, would be like minus two to plus two, sort of what our expectations would be like. Because you know, we have backlog that we work off. But we also have an awful lot of revamps that are actually our booked, and billed and processed in the period. So that's sort of the bandwidth. So it's actually down to – I guess you average it out to zero. As you recall, Dresser-Rand had a very strong fourth quarter of 2002, so you're dealing off of a strong base.

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Gary McManus: So you think basically, I mean you talking, when you say flat, you're talking year-overyear, not sequentially?

Herb Henkel: That's right, yes that's right.

Gary McManus: And you said, I mean but there's some buy-outs in there. So eight to 10 percent margin with, you know, you don't get any margin on the buyouts. I mean that's pretty impressive. But you also said, I guess, when answering Dave Raso’s question, that you're going to still have some productivity investments in their numbers as well?

Herb Henkel: That's correct.

Gary McManus: OK, but not to the same extent that we saw in the third quarter, the 11 million or so?

Herb Henkel: That's right.

Gary McManus: OK. And just secondly, just following up on Dave Bleustein’s question about, you know, kind of cash-flow priorities, how about acquisitions? I mean you've got the balance sheet, you know, balanced at a more normal level. Is a Hussmann or a Thermo King type of acquisition, you know, $1 billion to $2 billion in size, you know, would you consider it right now?

Herb Henkel: I would consider it, Gary, only if it had compelling mathematics. And what I would say to you is, right now those are hard to see. With difficult market conditions for many companies, expectations for pricing, I find, for the larger acquisitions, frankly reflects the future or maybe what it was in the past rather than what it looks like today. So I think our near-term focus will continue to be more on the IAS Bolt-on acquisitions that will probably be below the hundreds of millions of dollars level. And do more of those.

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Gary McManus: OK great. Great quarter. Thanks.

Herb Henkel: Thank you.

Operator: Michael Regan with Credit Suisse First Boston.

Michael Regan: Thank you. I was wondering if we could just dig into Security a little bit. Really, I would say blowout margins in that business for the quarter, and much stronger on a year-over-year basis than we've seen. Was part of it the absence of spending on new products, and some of that got shifted into the fourth quarter? Because you've already mentioned that that's going to bring margins back down into the 18 to 19 range. I was wondering if we could just get some details around -

Herb Henkel: Let me go over it, Mike, saying that there's really two parts to Security and Safety, one the Schlage more mechanical-type business where obviously you have the commercial as well as the retail. Commercial continues to be a tough marketplace. If you look at office constructions, so on, those are having tough times. But we still continue to see very strong activities in hospitals and other institutional type buildings. Our retail through Big Box continues to be up slightly as we wind up, continuing to get market share. Although the, you know, total same-store sales are not really that robust, i.e., they're not growing that much. So we see our Electronic Solution business actually growing 20 some odd percent. That business has margins, which are in the teens. The Schlage business is the 20s. So when you look at the magnitude of what we were doing, we came up with 21 percent. We did not cut back on really programs that we're looking at. It just so happens that you'll see in the fourth quarter, some of the programs that we were looking to kick off happened to hit into the fourth. They could have just as well been in the third. Again we have customers who are not ready to accept that part. So I'm expecting to see an incremental like $4 million or $5 million of expense going into "startups" of new products, key bolts and things of that nature. So overall the thing is when you look at that business going forward, we continue to see

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stronger shelf space, and retail continue in tough conditions, and commercial, that we're offsetting with new products. And then on the Electronic Access Control, we'll continue to see double-digit growth in that area.

Tim McLevish: You might also note, Michael, that last year we had about $5 million dollars worth of restructuring charges in the fourth quarter. So on a comparable basis you'd be looking at 19.3 percent last year, versus 21 through this quarter.

Operator: And our next question comes form Andrew Casey with Prudential.

Andrew Casey: Good morning.

Herb Henkel: Hi.

Andrew Casey: A question on the eight-percent organic versus the expected four to six. Can you kind of give a sense as to where the surprises occurred versus your initial expectation?

Herb Henkel: Well if I broke it down for you by sector, clearly I was positive going into the quarter on Bobcat, and I was pleasantly surprised on the up side, 15 percent excluding currency. That's a pretty robust number considering the economics that were in place. Dresser-Rand, we saw a lot more activity. And candidly, I think this is the key part that the management team there is working on to try to get rid of some of the seasonality we had in the business. So that is very large. And I guess the third real key driver that was a real positive surprise for me has to on Thermo King. We expected it to come out of its down markets where it was in the past. But it increased in every single element around the world. So I think those are the key drivers that exceeded our expectations.

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Andrew Casey: OK. And thanks. On a follow up to that – going into the fourth quarter, is Thermo King growth, on a year-over-year basis, hitting harder comparisons? Or is some of the bulkiness in orders that you may have seen from the large trans-ocean shippers kind of abating? Can you help me with that?

Tim McLevish: Yes. I think when you look at where we are for Thermo King full year; we do see that the quarters have been against weaker comparisons last year. I mean we were really in the trough in the first quarter, so we were up over 20 some odd percent. And then we wound up now that it's the mid-quarter; we were up like about 12 percent. And we think the fourth quarter is going to be somewhere in the six-to-eight-percent type range. So it is comparisons against a little harder comps. Although I think six to eight-percent growth, boy I tell you, I'd like to have a lot of those in a lot of different places.

Andrew Casey: Sure, thanks.

Operator: We'll go next to Joanna Shatney with Goldman Sachs.

Joanna Shatney: Good morning.

Herb Henkel: Hi, Joanna.

Joanna Shatney: Maybe I have this mistaken, but my impression was that their incorporation of Bermuda limits, basically isolates a certain amount of dollars of income from taxation. And as that net income number, or pre-tax income number actually grows, so should your tax rate. Can you just help us out with how it's staying at 14 percent? Is it the structure you set up in Ireland? And kind of, how do we think about that going forward as earnings come back with the recovery?

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Herb Henkel: Yes, I mean you're right, as our earnings do grow, do grow; we would get additional pre-tax income. And it would tend to push the rate up. However, what we're seeing for the third and fourth quarter of this year, we still anticipate it being in the 14 percent. And we've given guidance that, you know, going forward the nextcouple of years, we're certainly going to stay out of the 20percent range. So you see some flex there in subsequent years. It very much is dependent upon the mix of where the income is. And yes, we have worked very hard to make sure that we're optimizing that rate with our investment with IRI, the Irish subsidiary where we came up with, we're operating out of our Bobcat business unit. All of the international operations are being pushed through Ireland now, so that helps with that structure in our rates.

Joanna Shatney: OK. And then if you guys can just give us some more help on the order rates. In the previous conference call you guys had talked about how June had blown the doors off. Can you just kind of walk us through on a month-on-month basis? Was September, you know – I know it seasonally is the strongest month of the quarter, but if you can just walk us through, kind of, the growth rates on incoming orders, both in the U.S. and then also in Europe?

Herb Henkel: We saw the first and the second month of the quarter being basically what we had thought of as being close to plan. And then the third month came out to be exceptionally strong. And so we're seeing more of – and that's the second quarter in a row now where we saw that kind of rather than what we had seen before where it was stronger, then got weaker. And so the order pattern was in terms of at plan level of the four to six and so on, and a very, very strong close in September.

Joanna Shatney: And are you seeing that in Europe too, Herb?

Herb Henkel: Yes, across the board. And so I don't know if we had bigger vacations or so on, and we got back to work harder in September, but it was across the board. And the only one that was contrary to that Joanna was in Asia. I think we're still seeing some of the hangover, if you want to

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call effective to SARS stuff, because we're obviously involved in a lot of transportation issues there that that would be an impact on. That's the only place that was different.

Tim McLevish: Ordering in Thermo King and Asia was a bit soft. And their order is soft, particularly in the bus segments in Asia.

Joanna Shatney: OK, great. Thanks, guys.

Operator: Our next question comes from Jeff Hammond with McDonald Investments.

Jeff Hammond: Hi, good morning. Could you update us on how the Nirvana introduction is impacting share? You talked about market share gains earlier. Are you holding at a higher level, continuing to gain share? And maybe touch upon the oil-free Nirvana introduction. Where does that stand?

Tim McLevish: The market share that we reported, the eight-to-10-percent improvement last quarter, continues to grow as we continue to have success with Nirvana I and II. Oil-free is at this point in time, and in the very, very, very near future introduction, which I'd say we are very positive on having similar types of potential up side market impact.

Jeff Hammond: OK and then a quick clarification on the Security and Safety investments. You had said 4 million to 5 million of investments in the fourth quarter. Does that carry over, you know, on a quarterly basis into 2004?

Tim McLevish: No. These are a one-time event that have to do with the introduction of a new program, either at a key account customer-type activity, or a new product-type launch. So they're related to specific event, rather than being an ongoing recurring type thing.

Jeff Hammond: OK, thank you.

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Operator: We'll go now to Barry Bannister with Legg Mason.

Barry Bannister: Good morning, still.

Herb Henkel: Hey there.

Barry Bannister: Just a question with a related follow up on free cash flow. At what level, Tim, of you debt would you not be able to go below for fear of losing some of the inter-company borrowing that relates to your Bermuda tax rate?

Tim McLevish: I think those are – the inner company and the external are substantially disconnected. But we are not at any danger at our current levels. And I'm not concerned about that, Barry, at our anticipated future.

Barry Bannister: OK. And then on the related follow up concerning free cash flow – your cap ex at 125 million seems to be well below the depreciation portion of D&A. And if you would just give me the D, the A, the D&A, and also if your sales were, let's just say, to increase by a third over the next two-to-three years, where would you see your cap ex going relative to your depreciation rate? I understand that it's below now. But we're talking a third more sales in two-to-three years.

Tim McLevish: I think the best way to get started off with is why our levels are at 125 million. It's frankly because of the efficiencies we're able to drive in operations. What I reported is that over the last 12 months, we're able to produce 17 percent dollar-value product on the same square footage going through. I would tell you that as I looked, and we put together a five-year plan we just presented to our Board a few weeks ago, that brick and mortar, with the exception of geographic requirements in order to do business further in a different part of the world, whether it be Central Europe, Asia or so on, we do not have any "brick and mortar" type requirements in our key plan.

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So as a result, going forward, the idea of having some where around one-and-a-quarter to oneand-a-half percent of revenue as being our cap ex, goes all the way up to and including our doubling the size of the Company. Most of the cap ex that we're doing has to do with new product introductions, tooling and/or machining capabilities that are required, you know, for those areas. So I'll just skip the macro part of it and sort of give you the part on the D&A part, OK? D&A for us is a little over $200 million a year. And 80, 85 percent of that is depreciation, remainder amortization.

Barry Bannister: Thanks a lot, guys.

Tim McLevish: Sure.

Operator: Steve Haggerty with Merrill Lynch.

Steve Haggerty: Just two quick questions – can you talk a little bit about the different trends your seeing in infrastructure, the trends that are helping drive the strong results at Bobcat in the current quarter and going forward, and the trends that make you more cautious on the outlook for road machinery and portable power?

Herb Henkel: Let me do the negative, and wind up on the positive. The negative has to do with the T21 Bill and the funding that obviously is a serious question as States continue to have revenue problems based on the taxes that are out there. And so as a result we're concerned about North Americans. We continue to see real strength in Asia Pacific. But that percent, obviously, is relatively small compared to the North American market place. If I move over into the compact equipment side, what we've really got there is, we have small contractors who are our predominant customer group. And they are very, very busy in doing backyard works for you and myself in our homes, and into landscape activities, and around other types of institutions, schools,

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campuses. So we see in turn small contractors who are trying to bill at $100 an hour for the work. It continues to be a growing customer segment.

Steve Haggerty: OK and just a quick follow-up. In terms of the booking of the gain-of-sale on the Timken shares, when will that occur, and how will it be booked?

Tim McLevish: Book in the fourth quarter, and it'll come in other income.

Steve Haggerty: OK, thanks, guys.

Tim McLevish: About a $7 million gain.

Steve Haggerty: Thank you.

Operator: And our next question comes from Robert McCarthy with Robert W. Baird.

Robert McCarthy: Good morning, gentleman.

Herb Henkel: Good morning.

Robert McCarthy: Herb, could you clarify first what you were saying about (Hussmann) margins earlier in response to a question? You mentioned numbers of 8.7 and 10, that was service business only?

Herb Henkel: Yes. We were talking strictly on the service business.

Robert McCarthy: OK. So what kind of progress are we making? I realize you've got a lot of head wind in the equipment business. But what kind of progress are we making there? Was equipment above five in the quarter, finally?

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Herb Henkel: Yes it was. You can actually add 1.8 to that number. We actually were very, very close seven percent in the quarter.

Robert McCarthy: On the equipment business, independent of the service fees?

Herb Henkel: Yes.

Robert McCarthy: Very good. And can you talk a little more about – I was a little surprised to see the size of the restructuring accrual at Dresser-Rand, you know, coming after, you know, a period of you know, fairly intensive restructuring. What, what, what sparks another round, I guess, is what...

Herb Henkel: A further reduction of 450 people that are in the indirect and the SG&A are in.

Robert McCarthy: Is this something that was contemplated at the beginning of the year? Or is this a midstream, mid-year adjustment?

Herb Henkel: No this is a – you know, when we wound up knowing that our goal as a managementleadership team was to improve the performance of Dresser-Rand, we met with their team and put together a game plan, very similar in fact to what we went through with IR a couple of years ago. And what we laid out was basically an 18-month program, Rob, where we wanted to keep saying is that, this is phase one, this is phase two, and this is phase three. We are not in the process of going through phase two. And there is a phase three yet to come. So what we tried to do is really look at what is it to be able to lean out their manufacturing facilities? We have now through puts from 18 months down six to eight months, and that can frankly free up an awful lot of people that we had there beforehand. So what you're seeing here is just the second wave of reducing the overhead structure, and also leaning out of the manufacturing process. And I expect

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this to continue through the first quarter of next year. At Dresser-Rand we have a service business, after-market business, and we also have a "large" capital business. And we're really now focusing on doing both of those.

Robert McCarthy: And the eight-to-10-percent number for margin you're talking about in the fourth quarter, just to be clear, does it include the impact of incremental productivity investments?

Herb Henkel: That's correct. That is an all-in number net that we report on.

Robert McCarthy: OK, good. Thank you.

Herb Henkel: Sure.

Operator: Mark Koznarek with Midwest Research.

Mark Koznarek: Good morning.

Herb Henkel: Good morning, Mark.

Mark Koznarek: Just to clarify that last one, on Dresser-Rand, you expect to have more restructuring expense in fourth quarter, on top of this third-quarter expense?

Herb Henkel: That's correct, about $4 million or $5 million is our expectation.

Mark Koznarek: OK, great. The question I had was the area of productivity solutions, which I know it's now all Air Solutions, but if we just assume that it is, if roughly half the business is service, and that's at 20 percent margin, how can the total be 7.6-percent margin? Does that mean the OEM

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business is losing that degree of money? And you know if so, what's sort of trajectory for improvement?

Tim McLevish: Well, Mark, remember, included also in this sector's results are the numbers for our energy systems investments, for the micro turbine that we're continuing to develop. Those are still showing up at this point in time. And we're talking there about total costs for this year are somewhere around $24 million. So those numbers are also included in that entire sector's output. And you are seeing productivity solution results as well into the mix.

Mark Koznarek: OK. Let's see if we throw that 24 back in, that would, let's see, roughly suggest that we'd be around 10 percent. And again, that gets you around break even for the OEM business, you know, which still doesn't sound great. So, you know, with that roughly correct, and what should we be expecting for, you know the OEM compressor business going forward?

Tim McLevish: Again you have productivity solutions into that mix.

Herb Henkel: Yes, Air and Productivity Solutions numbers are included in that stuff, Mark.

Mark Koznarek: OK. So maybe I should just ask directly how is the OEM side of compressors doing?

Herb Henkel: The OEM side – the OEM side I still say to you is low single-digit profitability when you compare all of the numbers that are there. Because when you look at Air overall, like we describe in the margins of Air, it is still an area that we need to do better in. That's why we needed to introduce the Nirvana, which has better margins, and why I need to get in now with the oil-free solutions. That clearly, at this point in time, does not come up to the same level of performance as we have in the after market, which is obviously also why we're driving the aftermarket business area.

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Mark Koznarek: OK and one final detail. How much earnings-per-share came from currency this quarter?

Herb Henkel: I think it was maybe a couple pennies. It was about $4 million is the currency impact.

Mark Koznarek: OK.

Herb Henkel: Primarily obviously coming from Europe with Euro.

Mark Koznarek: OK, thanks very much.

Operator: And we will take our next question from Ann Duignan with Bear Stearns.

Ann Duignan: Hi there, guys.

Herb Henkel: Good morning, Ann.

Ann Duignan: Just a couple of follow-up questions. Looking forward to Thermo King, if we look historically, sales of refrigerated units have been about 13 percent of sales of trailer trucks. Is that still an applicable ratio to use going forward, do you guys think? Or has anything changed?

Herb Henkel: I think it's very similar to that. Maybe it's 15 or so, Ann, but I think it's the same level.

Ann Duignan: OK, so when we look into '04, that's a ratio we should be keeping in the back of our mind?

Herb Henkel: Yes I think so. I don't see any anomalies. We're not going to go to 58 foot or so. I think that's a ratio that's going to stay pretty constant there.

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Ann Duignan: OK. And just as a second follow up then, for your duel citizenship sales, where do these sales get reported, and where do the costs get reported?

Tim McLevish: The sales get recorded by the business unit who's products they are. And the costs wind up showing up also in those business units.

Ann Duignan: OK, so there's no additional corporate costs, or allocations, because of this?

Tim McLevish: No, not what they did. We're talking about four-to-eight people that are actually involved "pulling together the activity." And their job is to create the introduction of one sales person to the other.

Ann Duignan: OK. And then just as a final follow up on Dresser-Rand, that business seems to be a large source of volatility from quarter to quarter. Is there any bright spot in terms of selling the business?

Herb Henkel: Well I think I would focus on the – our job for 2004 is that we wind up realizing 40 percent of the profits in the first half, and 60 percent in the second half as we try to eliminate some of this volatility. Some of the things that you're seeing now with these significant moves and volume are related to the buy-out that we have been doing, frankly for customer convenience, so that we would be able to provide them an entire package. We have now started charging for that, to provide some value for our shareholder revenue, and just for the customer part. And what we wound up doing those pieces, we're now seeing in terms of a much, more level flow going forward are after-market pricing, and our buy-out code changes. OK I think we're improving the profitability and also improve the process and the constancy of the quarter-to-quarter earnings.

Ann Duignan: Does that make it an easier sell? Or are you seeing you now are considering retaining that business?

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Herb Henkel: Now remember I told you that out job is to turn this into increasing shareholder value. And what we've looked at the five-year plan, we still are challenged with the customers that we have, and the cycles that this thing goes through. So to me, this is one that continues to need work in order to get it to the stated levels of profitability and ROIC. I see improvement, Ann, but I do not yet see the targeted end zone that we were going after. And that means that we have two options, keep working on to make it better, or find someone else who is going to be, you know, paying us a fair value for it. Both options are on the table.

Ann Duignan: OK, thanks.

Operator: And our next question, gentlemen, will come from Karen Ubelhart with the Government of Singapore Investment Corp.

Karen Ubelhart: Hi. Let's see – you answered a couple of them. Number one, can you just clarify, on capital spending going forward, did you say one-and-a-quarter, one-and-a-half of revenues?

Tim McLevish: Yes that's correct.

Karen Ubelhart: OK. And then you mentioned in the release, a one-time accounting benefit. Could you quantify that?

Tim McLevish: Yes, it was the one in other income?

Karen Ubelhart: Yes.

Tim McLevish: It was 3.8 million.

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Karen Ubelhart: OK. And what was that related to?

Tim McLevish: Well it was actually – we had identified some issues on the balance sheet that date back to, as far back as 1999. There actually, you may know, it's a Dresser-Rand. We cleaned up a number of old items there. On the Dresser-Rand side you saw that there was a charge in Dresser-Rand, the net of them was about $2.5 million. It's really cleaning up some old items, some inventory things, some old purchase reserves that sat out there from the year 2000.

Herb Henkel: And Karen, if I could just give you some on that. You know, it says when we sold Torrington, we sold what was the most capex intensive business. Torrington was running around five percent on sales. So if you were to go look at the capex going in the past as a percent, that would have increased the level up to like two percent. That's why we're now running below, because we took that five percent off the table.

Operator: We'll take our next question from Davin Ang with Chilton Investment Company.

Davin Ang: Hi. I just wanted to ask why changed outlook for the dumping subsidies in 2003? And also what your outlook is for 2004?

Herb Henkel: Well we don't – we don't have perfect visibility into that. That's something that's accumulated by the customs department. And we get some reports that had suggested our original $50 million expectations was just based upon some reduction from where it was last year in the level of activity. We have gotten some information that just suggested that is a number more consistent with what we now reflect. And going into '04, as you know, we only get 80 percent according to our arrangement with Timken. As we look into '04, there is greater uncertainty as time goes on as to whether the CDO will continue to be with us. We're having a difficult time anticipating what that might be.

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Davin Ang: You're at 50 million before you said that, so you would ...

Herb Henkel: We originally had anticipated $50 million. Now we're thinking it's more like $35 to $40 million.

Davin Ang: For '04?

Herb Henkel: For '03. If we were to pick a number for '04, it would probably be more like 20, 25 million.

Davin Ang: 20, 25, OK, thank you.

Operator: And we'll go next to Quint Nufer with Lazard Corporation.

Quint Nufer: Hi gentlemen. Have you done any preliminary work now or yet on what you're pension head wind would be next year with the reduced discount rate?

Herb Henkel: We've already reduced our discount rate in the largest of our plans. We're at six-and-a-half on that. And as you know, we've had considerable appreciation in asset value. You know, normally November 30th is the date, is our measurement date for our pension. It turned out that as a result of the divestiture of (Torrington) this past year, we had to re-measure in February. So we are sitting at a relatively low – I think the Dow was about 8,200 when we re-measured. So we've seen considerable improvement in our asset values. And at that time we also reduced our discount rate. So I'm actually a reduction in pension expense going into 2004.

Quint Nufer: OK, thanks.

Operator: And gentlemen, we do have a follow-up question from David Raso with Salomon Smith Barney.

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David Raso: Yes a couple of quick questions. 1Q (was the inventory). Now we've restated the balance sheet a couple times with this stop. And some of their -- states don't go that far back, so I don't have a clean history. But if you look at inventory days of sales right now, and now below 40 days. It's one of the lowest I think you've had ever. Given the fourth-quarter inventory typically goes down sequentially, I'm just trying to think through what's going on. Is there some individual businesses where the inventory is fairly depleted, and that' why the business is being run out going forward? It's just suggesting going into '04, you know, it could be upward bias your production schedule given how low inventories are. I just want to make sure I'm not mis-reading a change, and some businesses are being run.

Herb Henkel: As we've mentioned before that are aggressively trying to manage our working capital to lower levels. You know, that's being accomplished by better sales and operation planning. It is being accomplished by more lean manufacturing to enable us to reduce the cycle time. So I mean it is obviously our intention to reduce that, and we're quite comfortable as that draws down.

Tim McLevish: I do not know any business, David, where we have "an inventory issue" at this time, with the possible exception of one plant in Bismarck where they are working feverishly to pump out the demand. OK that's going on. That's the only ones where I would say is that we're actually "living close to" the level that we have. I think the rest of the areas simply reflect the ability to deliver product on a more timely and lean up plant.

David Raso: Well speaking of Bismarck and that business segment in general, pricing, can you give us some help on pricing trends in these business. It appears some of your equipment business is on an Infrastructure side, you know, could be looking to raise price soon. Can you just give us some help, Thermo King revenues, obviously are up, pricing potential there? Can you help us?

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Herb Henkel: Let me give you a macro viewand that's that overall a positive number. For the "quarter" for cash and for pricing. That's the first time I can cheer in four years. If I look at it specifically in what I think was publicly already disclosed, the fact that there are price increases now taking place when it gets to the infrastructure type businesses, road and so on. And as we look at the Thermo King as you're describing there, obviously that, as that equation turns out to have higher demand, we're starting to see some real positives. And as we improve and bring out the Magnum-type products, we're starting to really see in terms of the ability to charge, if you will, fairly for the value that we're creating extra. So overall, I'm starting to see now, actually an up tick on pricing compared to the downward pressures that we had beforehand. The only one that I tell I continue to see difficulty in is some Road Machinery as it gets specifically in the North American market place. That's the one that comes to the top of my mind as being a pressure issue.

David Raso: And two quick ones, probably more for Tim. The legacy costs – I thought they were running at 7.2. And I see they came in at 9.5. Are there incremental costs now in there that we should be modeling in 9.5 per quarter of legacy?

Tim McLevish: Yes, five to six cents a quarter is probably a good number for that. We've picked up some additional, obviously with some costs associated with Engineered Solutions that we'll continue.

David Raso: And lastly, the comp, obviously last week it was higher profile for a lot of people, this issue. What is, what's the guidance you can give on the cost associated with the stock-based comp going forward? Is it something we can watch on how much the stock goes up?

Herb Henkel: David, I'm praying this is a big number, David.

David Raso: Yes, well can you help us with – I mean you know, some range when the stock goes up over a level?

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Tim McLevish: Yes. I mean put it this way. Over the quarter we say $4.5 worth of stock price increase. And we saw this level, you know, $11 million worth of charge associated with it.

David Raso: And that relationship should hold, that two-and-a-half times, kind of the dollar-per-share versus millions of dollars of higher cost to you?

Tim McLevish: I think that's a good relationship. Although having said that, we are looking for ways that we can, we can, we can essentially hedge that. But right now it becomes a little bit difficult from accounting standpoint, but we are very much looking to see if there is a way we can address that.

David Raso: OK, thank you very much.

Herb Henkel: Operator, we're going to take one more question, please.

Operator: And our final question, gentlemen, will come from Barry Bannister, with Legg Mason.

Barry Bannister: OK. By the way, it was a great two quarters in a row, Herb.

Herb Henkel: Hopefully a sign of things to come, Barry.

Barry Bannister: Thanks. The opeb portion of the CDO seems to be going up while the CDO announced is going down and probably disappears within a year or two. What is the growth rate of that discontinued op portion, since it does seem to have this below-the-line swing factor every time we get a quarterly earnings report?

Herb Henkel: Barry I must have missed your question?

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Barry Bannister: Well the 14 cents which you sited in the press release related to the legacy cost of the discontinued operations.

Herb Henkel: OK. Yes it's – I mean what we saw is, we have a couple more discontinued business that we add into the mix this quarter with Waterjet and with Laidlaw, which brought in some continued, discontinued operation costs. And we're still, we're still kind of getting to a neutral point, but getting to an ongoing cost relationship with Torrington. Obviously we're still carrying some of the severance costs there from people. And we're still carrying some of the runoff of medical benefits and so forth. So we still expect it to be kind of a five-to-six cents legacy cost per quarter.

Barry Bannister: OK. So you don't see a significant growth-rate change in the legacy cost, whereas other people are seeing it on the medical side quite a bit?

Herb Henkel: I think that's reflected in the five to six cents of cost per quarter.

Tim McLevish: That's included in that number already, Barry.

Barry Bannister: OK and then just lastly. When we look at Climate Control and Compressors, you talk often about service contracts. But I'm trying to gauge whether these are just 90-day cancelable contracts, or one-year tie-ins. Exactly how are they structured so that we can at least be confident that you'll be able to retain the customers you've added, not just grow them.

Herb Henkel: You're usually talking about a one-year commitment that winds up then being reviewed and renewed, hopefully when that is completed. The pricing is set up, and sometimes they're time and material, and sometimes they're fixed for a given location. But in general, the duration I would tell you is one year with a review and a renewal by both parties at that time.

Barry Bannister: Has attrition been an issue? It's pretty early to say.

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Herb Henkel: No I would tell you, actually the thing that's been an issue for us is in some of the fixed costs contracts. We now know the difference. I would tell you personally, how much it costs to repair a supermarket that has seven-year-old display cases in it versus one that is brand new. So those kind of learnings are helping us too" in our pricing model" as we wind up going forward. That's the kind of learning I would tell you is more important than anything else. I think some of the customers got a heck of a deal from us at the beginning. And we’re now adjusting some of those pricing points.

Barry Bannister: Well thank you very much.

Herb Henkel: Sure, thank you.

Operator: And gentlemen, that will conclude our question-and-answer session. I'd like to turn the conference back to you for any additional or closing comments.

Joe Fimbianti: Thank you very much. We're wrapping now. Thank you for joining us. There'll be an instant replay of today's conference call available at approximately 3:00 P.M. today, and it'll be available until October the 29th. The call-in number is 888-203-1112. And the pass code is 537861. And the international call-in number is 719-457-0820. The audio and the slides of today's conference call will be archived on our Web site. And finally, the transcript of this conference call will be available on the Ingersoll-Rand Web site, hopefully at the end of next week.

Please call me again – this is Joe Fimbianti – if you have any additional questions. I'm at 201573-3113. This concludes our call. Thank you.

Operator: Thank you for your participation on today's conference call. You may disconnect at this time.

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